Side-Hustle or Remotely Employed?

Many Americans have looked at new ways to make a living due to the pandemic undermining some traditional employment options. In a post-pandemic world, many job seekers will look towards the gig economy for answers.

The gig economy has been around for a while. You will have noticed these individuals in your community as self-employed individuals who mow lawns, deliver papers, provide childcare or work temporarily on your farm during harvest.  More recently, though, technology has removed a lot of barriers to high-paying, full-time and part-time remote employment.  Some of these jobs will require a degree while others require only the many skills and knowledge you already possess.

If you are looking into or already committed to earning a living in the gig economy, you will most likely find yourself in the following statistics.

  • 57.3 million people freelance in the U.S. It’s estimated that by 2027 there will be 86.5 million freelancers. (Upwork)
  • 36% of U.S. workers participate in the gig economy through either their primary or secondary jobs. (Gallup)
  • For 44% of gig workers, their work in the gig economy is their primary source of income. (Edison Research)
  • For 53% of gig workers aged 18-34, their work in the gig economy is their primary source of income. (Edison Research)
  • Gig employees are more likely to be young, with 38% of 18-34-year-olds being part of the gig economy. (Edison Research)

If becoming part of the gig economy is in your future, there are a few things to remember:

  • Keep on top of your paperwork
  • Set aside money for taxes
  • Contribute to an IRA
  • Make use of tax deductions.
Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Tax Law worth knowing: EITC “Look Back”

If a mention of tax law causes your eyes to roll back in your head, I ask you to snap out of it for a minute, because this one is important to ordinary households. It’s new (and temporary) — part of the new COVID relief bill enacted this past week, and it will be huge for many workers who have been unemployed or had reduced earnings in 2020.

The Earned Income Credit is a powerful tool for helping working families with lower wages. The amount you receive depends on your earned income. Higher earnings (up to a point) means higher EITC.

2019 EITC Chart: Married Couple with 2 children

Here’s a 2019 example: A married couple with 2 children and with earned income between $14,550 and $22,400, was eligible for an earned income tax credit of $5,828 in 2019. That’s an extra $5,828 added to their tax refund. If their income was below $14,550 then their EITC was lower, but even if they only earned a small amount from work, they would receive some EITC. If their income was higher than $22,400 the amount of EITC gradually dropped, but they would still receive some EITC even if their income was as high as $52,400.

Suppose: a married couple with 2 children earned $25,000 in 2019, and received an EITC of $5,785. However, in March of 2020 they were laid off. They did receive unemployment, but that is not earned income. Their actual earnings from work in 2020 was only $5,000, which made them eligible for EITC of $2,010. That’s a loss of over $3,700, in a year when they were already struggling. The “look-back” provision in the new relief bill allows them to receive EITC (and also the Child Tax Credit) based on their 2019 earned income if it would be more beneficial.

By contrast, imagine a married couple with two children who had earned income of $60,000 in 2019. Their income was too high for EITC in 2019. However due to furloughs, their earned income in 2020 was only $40,000. They will be eligible for EITC in 2020 based on their 2020 earnings (assuming they meet other eligibility rules). When calculating EITC and CTC, taxpayers can choose to use either 2019 or 2020 income figures, depending which is better for them.

Tax law worth knowing!

Source: Kitces.com

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Did you give? Take the deduction!

I love the fact that “Giving Tuesday” has become an annual tradition in the U.S. If you have made gifts to charities anytime during 2020, you may be able to take a tax deduction even if you do not normally itemize deductions!

The CARES Act allows people to deduct up to $300 of charitable giving on their federal tax return without using Schedule A, which is the “itemized deduction” form. That’s great news, because even the lowest standard deduction (federal) is more than $12,000; that means that it’s not worth itemizing deductions if your total deductions would be less than that. Due to the special rule for 2020, taxpayers who gave to charity will be able to deduct their charitable gifts up to $300 while ALSO claiming the appropriate standard deduction. Note: the special CARES Act rule applies only to donations of money; donations of goods, such as clothing or household goods donated to Goodwill or Salvation Army, can only be deducted if you itemize.

What to do? if you made monetary gifts to qualified charitable organizations, gather up your receipts and keep them for tax time. Can’t find the receipt? Cash gifts with no receipt cannot be deducted, since there is no evidence of the gift. But gifts made by check can be deducted even without a receipt, as long as they were bona fide gifts and not payment for something. Here are some examples to explain some common mistakes:

  • Suppose you and your spouse ate at a spaghetti dinner that was sponsored by a local non-profit for free will donation, and you put $20 in the basket. That $20 is NOT a charitable contribution because you received a meal in exchange for the money you gave.
  • Gifts to political or commercial organizations are not tax deductible. The charity should tell you if your gift is tax-deductible, but if in doubt, check the IRS database.
  • If you include $30 in a sympathy card after a person’s death, intending it for the charity of the family’s choice, that is NOT tax-deductible, because you don’t know if it was used for charity. However, if you make out a check to a charity in honor of the deceased individual, that is a deductible contribution.

The Internal Revenue Service is the authoritative source for information on charitable contributions and all income tax topics. Click here for information on this special deduction for 2020.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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EIP Day November 10

If you did not receive your $1200 Economic Impact Payment, it’s still not too late – they delayed the deadline! Next Tuesday, November 10 is designated as EIP Registration Day. Take advantage of this awareness campaign and claim your credit now! NOTE: If you’ve already received your payment, please help us spread the word. If you have ways of reaching people who are homeless, that may be especially important!

The big push at this point is to reach those who do not normally need to file a tax return. The IRS has a special on-line portal just for you folks, where you can enter all the needed information. This video explains how. NOTE: you will need to enter personal information, so be sure you are using a secure internet connection. This will usually take 10-15 minutes.

Iowans who need help with this process are encouraged to contact their local Extension family finance specialist for help. For more information go to the IRS information page on the EIP; to help spread the word via social media, check out the IRS Facebook, Twitter, Instagram, LinkedIn, or YouTube sites.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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October Dates to Remember

Around this time of the year, I get a surge of individuals wanting me to prepare the previous year’s taxes. Then I remember…October 1 is the first day to file the FAFSA for college financial aid. Some colleges award scholarships and financial assistance on a first-come, first-served basis.

October Dates to Remember

October 15 is the new deadline to file your return if an extension was filed earlier this year.  If you filed for an extension on your taxes, October 15 is also the last day to contribute to a SEP IRA for self-employed people and small business owners.

Sometime in the fall, usually beginning in October or November, most employers hold their open enrollment period so you can change your employee benefits for the upcoming year. Review your health election, 401(k), and other employee benefits like life and disability insurance to see if they’re still meeting your needs. Do you have a flexible spending account (FSA)? Use those funds for qualified medical expenses or child care expenses by the end of the year. That money generally won’t roll over into next year. If you have a health savings account (HSA), that money will roll over and is tax-deferred, so consider maxing it.

November 1 is just around the corner and is the opening day of the federal health insurance marketplace enrollment for 2021 coverage. Iowa State University Extension has online class scheduled to help individuals choose wisely, the kind of health insurance they need.  The Smart Choice Basics class is intended for individuals that are 65 or younger and helps you select the right plan. Smart Choice Actions teaches individuals how to make wise use of the health insurance plan and intended for adults of any age.  Both workshops are 1 hour long at begin at 6:00 PM.  For dates and registration information, go to…

10/26/20  Smart Choice Basics

11/2/20  Smart Use

11/19/20 Smart Choice Basics

12/1/20  Smart Choice Basics   

12/8/20  Smart Use

Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Unemployment and Taxes

Did you know unemployment benefits count as taxable income? If you (or someone you know) have received unemployment income during this year when so many people have experienced job loss, here is the bigger question: Did you have taxes withheld from the payments?

If you are currently receiving unemployment income, now is a good time to check and see if federal and state income taxes are being withheld; if they are not, you should be able to change that going forward. Why does it matter? Next winter when you file your 2020 tax return, you will find out how much tax you owe on your 2020 income. If you didn’t have enough withheld from your paychecks, then you may need to pay in by April 15. It’s possible that the amount you need to pay in could be $1,000, $2,000 or even more. In addition, you may owe penalty for not having enough withheld, and/or a penalty for late payment if you cannot pay the bill in full by April 15.

What can you do now? If you received unemployment income and did NOT have taxes withheld, I would encourage you to go to the IRS Tax Withholding Estimator, and enter information about all your income for the year, along with the information it asks for about family size and other tax-related issues. Don’t worry; this is anonymous – it’s just a calculator for your own benefit. Based on the results of your calculations, you should have a pretty good idea of what to expect. If it looks like you will owe taxes, you can start saving now, or even send in one or two quarterly estimated payments using IRS form 1040 ES. Checking in with your tax preparer might also be a good idea.

The IRS recently issued a poster alerting people to take action and avoid the unpleasant surprise of a big tax bill. If you can, please consider posting it on social media or posting printed copies at your place of work, or house of worship, or at local businesses, to help others plan ahead.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Officially ending a marriage simplifies taxes

Every year during tax season I come across people who are still legally married even though they haven’t had contact with their spouse for years. They cannot file a tax return as “Single.” If they aren’t divorced or legally separated, that leaves them stuck with a “Married Filing Separately” (MFS) tax status.

There are several disadvantages to using the MFS filing status, including:

  • You are not eligible for Earned Income Credit.
  • You can not deduct student loan interest paid.
  • You do not qualify for Education Credits (American Opportunity or Lifetime Learning Credit) related to college expenses.
  • You must know and list your spouse’s name and social security number on your tax form; if you cannot, then your tax return will need to sent in by mail instead of submitting electronically.
  • If one spouse itemizes deductions, the other spouse must also itemize deductions.
  • On the Iowa return, you must report approximately how much income your spouse has; if you cannot, then your Iowa return will need to be sent in by mail.

There is an exception – one group of people who are split from their spouse but do not have to file MFS. These are people who are paying the cost to keep up a home for someone else (typically a parent who is keeping up a home for his/her children).  These individuals can be “considered unmarried” if they have not lived with their spouse at any time during the last six months of the year; if so they qualify for “Head of Household” filing status, which allows them to receive the Earned Income Credit and other tax benefits. However, when the children are grown and the taxpayer can no longer claim “Head of Household,” then they must use Married Filing Separately as their tax status.

“What’s the point of all this?” you may be asking.  I have two reasons for covering this topic today, as this long COVID-extended tax season finally approaches its end.

  • First, I’m tired of breaking bad news to people – the news that their tax return may be difficult to file and they can’t get some of the tax credits they might want.  
  • Second, to put forth the suggestion indicated in the title: If the marriage is over, maybe it would be smart to make that official. If you have reasons to avoid divorce, consider a legal separation if possible. Taking that step would make tax filing easier for both parties.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Nursing Home Residents: Keep your economic impact payment

If finances are tight, the federal economic impact payment being issued through the CARES Act for coronavirus relief may have a big impact on your well-being. Unfortunately, residents of care facilities in many states (including Iowa) are being told incorrectly that they must relinquish their payment.

This problem occurs when an individual is receiving Medicaid benefits to help cover the cost of their care. Nursing home administrators, acting on misinformation, believe they must recover the extra income to defray Medicaid costs. However, the CARES Act specifically labels the payments as “tax credits,” and tax credits are exempt from income and resource limits placed on those who are benefiting from certain government assistance programs.

Nearly every United States household should receive an economic impact payment, including households that receive Social Security, Supplemental Security Income (SSI), or Veterans Administration benefits. The payments should be deposited automatically to the same account where you receive either your tax refund or your SSA, SSI, or VA income. The IRS, which is responsible for issuing the payments, offers a lookup resource to help people track their payment. Note: the look-up link for those who do not file a tax return is separate from the link for tax filers; be sure to use the correct link.

If you have loved ones living in care facilities, especially if they are receiving Medicaid benefits to help cover the cost of care, be on the watch for any attempts to get them to turn over their economic impact payment to the facility. If this has already occurred, it should be refunded; contact the Iowa Attorney General’s office for help if needed. Note: it is important to keep in mind that nursing home administrators who try to claim the payment are not trying to steal; they are trying to do the right thing, but are simply misinformed about what the law requires.

Source: Federal Trade Commission

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Financial Cause and Effect

As a site coordinator and quality reviewer at a local Volunteer Tax Assistance site, I am able to see hundreds of real-life examples of “cause and effect”. 

  • What EFFECT will cashing out my 401k have on my taxable income? It may CAUSE a portion of your Social Security taxable.
  • What EFFECT will $24,000 of income (with no withholdings) have on a 19 year-old full-time student living at home? The EFFECT will be felt by the student who will owe taxes and by the parents who will not be able to claim the child as a dependent.

The most recent unpleasant EFFECT was CAUSED by gambling winnings.  A very lucky woman in her 70’s received a W-G from a local casino, indicating she won $20,800 worth of winnings with NO taxes withheld. The fact that no taxes were withheld did not bother her because she also had documentation showing her losses, which far exceeded her winnings. She knew that her losses could be deducted from her winnings. What she did not understand was…

  • She could only write-off the losses that were equal to her winnings…meaning…of the 25,000 of losses she had incurred trying to win the $20,800, she could only write off 20,800.
  • What she also did not know was…The losses are reported on a schedule A, while the winnings are counted as income. Once the winnings were added to her pension income and the $26,418 of social security income, she discovered that, not only had the winnings pushed her into a higher tax bracket, her income now was high enough that $13,661 of her Social Security was now taxable. Last year, with no gambling winnings, none of her Social Security was taxed.
  • It was only after her total income was calculated that she could subtract her itemized deductions (which included her gambling losses). 

The combination of increased income (due to gambling winnings), plus the increased tax bracket, plus the increase in the taxable portion of her social security, and the fact that there were no tax withholding on the gambling winnings; this woman owed more than $2000 for her federal tax return…something she had not anticipated.

Before doing anything different with your money, it is important to stop and consider what effect it will have on your tax return.

Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Income Taxes in Retirement

United States tax forms

As a volunteer tax preparer with VITA (Volunteer Income Tax Assistance), I frequently wish people understood taxes better. In recent weeks I’ve done three tax returns for people who, in their first year of retirement, cashed out their entire IRA or 401(k) account (ranging from $15,000 to $60,000).

In most cases, these new retirees used the funds for their long-term benefit – major home improvements and other purchases that will help them in the long run. I think they probably thought about the fact that spending the money now means they’ll live on more limited income for the rest of their lives, and they decided that was okay with them.

But I do NOT think they understood the tax implications of their decision, and I found myself wishing I would’ve had the chance to explain it all before they decided to withdraw the whole amount at once. Here are some things retirees should know:

  1. Withdrawals from “traditional” IRA, 401(k), and similar retirement plans will generally be included in your taxable income. Large withdrawals can easily move you into a higher tax bracket, meaning that you pay a higher tax rate on some of that income. For a single person, income above about $53,000 is typically subject to a 22% tax rate, rather than the lower 10% or 12% rate.
  2. The first year of retirement is especially tricky for income tax purposes, because usually the person also had employment income for part of the year, which may contribute to bumping them into a higher tax bracket.
  3. Social Security income is only partly taxable (at most 85% of it is subject to tax). How much is taxable depends on how much other income you have that year. When a person has very low income, none of their Social Security income will be taxable; as their income increases, the portion of Social Security subject to tax also increases. That means that large withdrawals from retirement accounts can create a double-whammy by increasing the taxable amount of Social Security as well has increasing total income.

I know that some of the clients I served paid at least $5,000 more in income tax than they would have if they had spread their retirement plan withdrawals over five years, or even over two or three years. I’m also pretty confident that they did not really understand the tax impact when they made the decision to withdraw it all at once.

Bottom line? Before making decisions about withdrawing from retirement plans, consider various options and get information from someone who is knowledgeable about taxes. If you don’t have a tax expert to ask, try using IRS form 1040-ES (estimated taxes) OR the IRS online withholding estimator to compare different options. Note: remember to consider state income taxes, as well.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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